Category: Market Action

The Bank of Canada has released a working paper by Katya Kartashova titled The Private Equity Premium Puzzle Revisited:

In this paper, I extend the results of Moskowitz and Vissing-Jørgensen (2002) on the returns to entrepreneurial investments in the United States. First, following the authors’ methodology I replicate the original findings from the Survey of Consumer Finances (SCF) for the period 1989–1998 and show that the returns to private and public equity are similar. I then extend the period under consideration using data from subsequently released waves of SCF 2001, 2004, and 2007 and assess the robustness of their results to this extension. I find that the “private equity premium puzzle” is not a robust feature of the data and does not survive beyond the period of high public equity returns in the 1990s. In particular, returns to entrepreneurial equity remain largely unaffected when public equity returns plunge to near zero values between 1999 and 2001. The average return to private equity exceeds public equity return in 1999-2007 and for the period 1989-2007 as a whole. To validate the results, I provide alternative measures of private equity returns in the data.

The Bank of England has released a working paper by Filipa Sá, Pascal Towbin and Tomasz Wieladek titled Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation:

A number of OECD countries experienced an environment of low interest rates and a rapid increase in housing market activity during the last decade. Previous work suggests three potential explanations for these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how these effects change with the structure of the mortgage market and the degree of securitisation, we augment the VAR to let the coefficients vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and real residential investment. The responses of housing variables to both types of shocks are stronger in countries with more developed mortgage markets, roughly doubling the responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation is particularly strong for capital inflows shocks, increasing the response of real house prices, residential investment and real credit by a factor of two, three and five, respectively.

A mixed day on the Canadian preferred share market, but mainly down. PerptualDiscounts gained 9bp, FixedResets lost 8bp and DeemedRetractibles were off 14bp. Volume picked up a bit, to elevated levels.

No commentary today because … er … because … um … because it’s a full moon! That’s it, full moon tonight, therefore no commentary.

A good day on the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets down 1bp, and DeemedRetractibles gaining 4bp. Volatility continued to be very low, with only one entry in the Performance Highlights table; volume subsided to average levels.

There’s an interesting claim of regime switching in stock-bond correlations:

Based on his analysis of data over the past 20 years, the tipping point is a yield of about 4 per cent.

When the 10-year government bond yield is below that threshold, bond yields and the S&P/TSX composite index tend to move together, with a positive correlation of 0.49, strategist with UBS Securities Canada] Mr. [George] Vasic found. That’s to be expected, because very low bond yields are usually associated with sluggish or recessionary conditions, and when the economy starts to improve, yields and stocks both rise.

However, when bond yields are between 4 per cent and 6 per cent, stocks and bond yields tend to move in opposite directions, with a correlation of negative 0.56. In other words, when yields are already high and climbing, the stock market starts to feel the brunt of rising interest rates. (A correlation of 1 represents a perfect positive relationship, while negative 1 indicates a perfect inverse relationship.)

One thing that is well known is that correlation signs reverse in times of financial stress; it’s unclear whether this is anything new.

Prices slid somewhat in the Canadian preferred share market today, with PerpetualDiscounts down 7bp, FixedResets losing 6bp and DeemedRetractibles off 8bp. Volatility was low, with only one issue in the Performance highlights. Volume was heavy.

The Boston Fed has released its 2H10 Research Review:

• Public Policy Discussion Papers
  • Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations, Scott Schuh, Oz Shy, and Joanna Stavins
  • $1.25 Trillion Is Still Real Money: Some Facts about the Effects of the Federal Reserve’s Mortgage Market Investments, Andreas Fuster and Paul S. Willen
  • Reasonable People Did Disagree: Optimism and Pessimism about the U.S. Housing Market Before the Crash Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen (discussed on PrefBlog)
  • A Profile of the Mortgage Crisis in a Low-and-Moderate-Income Community, Lynn M. Fisher, Lauren Lambie-Hanson, and Paul S. Willen
• Working Papers
  • In Search of Real Rigidities, Gita Gopinath and Oleg Itskhoki
  • Strategic Choice of Preferences: The Persona Model, David H. Wolpert, Julian C. Jamison, David Newth, and Michael Harre
  • Some Evidence on the Importance of Sticky Wages, Alessandro Barattieri, Susanto Basu, and Peter Gottschalk
  • Imputing Household Spending in the Panel Study of Income Dynamics:
    A Comparison of Approaches, Daniel H. Cooper

  • The Distress Premium Puzzle, Ali K. Ozdagli
  • Characterizing the Amount and Speed of Discounting Procedures, Dean T. Jamison and Julian C. Jamison
  • Internal Sources of Finance and the Great Recession, Michelle L. Barnes and N. Aaron Pancost
  • Affective Decision Making: A Theory of Optimism Bias, Anat Bracha and Donald J. Brown
  • The Financial Structure of Startup Firms: The Role of Asset, Information, and Entrepreneur Characteristics, Paroma Sanyal and Catherine L. Mann
• Public Policy Briefs
  • Evidence of a Credit Crunch? Results from the 2010 Survey of First District Community Banks, Jihye Jeon, Judit Montoriol-Garriga, Robert K. Triest, and J. Christina Wang
• Multimedia
  • The Great Recession (video), Christopher L. Foote

My discussion with Assiduous Reader Drew (in the comments to February 11) got me thinking about the propriety of allowing Exchanges to determine who gets listed. For instance, it is possible that this made sense long ago, when (I’m speculating) listing fees were a lower proportion of Exchnge revenue than they were now? Is it possible that the rationale behind the regulatory contracting-out of this gatekeeper function is now obsolete?

I went looking for a chart showing proportions of Exchange revenue over time.

I counldn’t find one, but it turns out – naturally enough – that this has not only been thought of before, but has been a big issue. Jonathan Macey and Maureen O’Hara (who has been mocked on PrefBlog) wrote paper titled From Markets to Venues: Securities Regulation in an Evolving World:

Few issues better reflect this divergence of interests than the listing and delisting of securities. Exchanges have traditionally used listing standards to support their “signaling role” of attesting to the quality of firms trading on the exchange. In return for this endorsement, listing firms paid both initial listing fees and continuing listing fees. These fees have been an important source of revenue for stock markets, particularly in the U.S where listing fees have often been upwards of 30% of the NYSE’s overall revenues.

When it was the case that where firms listed determined where shares traded, these fees could be justified as paying for the ongoing regulation of trading. As we have argued earlier, however, the listing-trading connection has broken down, and trading currently takes place on whichever venue provides the greatest liquidity. There is increased competition for listings. Listing fees now represent almost a fee for access to the US markets, a monopoly rent as it were to the few exchanges and venues empowered to list firms. From a purely economics perspective, since exchanges can list firms whose stocks they may not actually end up trading, the incentives are surely to list more firms than would be optimal if listing and trading were linked. Concerns over such perverse incentives were recently raised in Hong Kong, where a government appointed commission pushed for the transfer of the listing function to the regulator from the exchange arguing that “As a listed company motivated by profitability, the HKEx has a clear interest in listing as many companies as possible since listing fees represent a significant portion of revenues (18% in 2002) and there is a disincentive to allocate revenues to enforcement with is costly and produces no revenues.”

Which is my point exactly. A potential criticism of the TMX-LSE deal is that the TMX has regulatory functions and we might not want those to be under foreign control. But assuming that the functions need to be performed at all, should they be performed by the TMX in the first place? Would it be reasonable, for instance, to say … “OK, go ahead and merge …. on the condition that the Listing Authority gets spun out as a stand-alone company.” … ?

For the security market as a whole, however, listing and delisting standards play an important role by delineating the quality of firms allowed to access a country’s capital markets. Restricting access or denying trading privileges is thus a public good in that it enhances the overall quality of the market. Entrusting this decision to self-regulating exchanges is suboptimal because as with any public good, the social costs exceed the private costs. As we have argued above, self-regulation cannot succeed when this is the case.

Vehemently disagree. This has the implicit view that capital markets are stupid and it is wise regulators who should decide who gets to take advantage of the suckers.

It was another mixed day on the Canadian preferred share market,with PerpetualDiscounts losing 6bp while FixedRestes gained 3bp and DeemedRetractibles were up 6bp. Volatility remained low. but volume picked up and can be described as heavy.

PerpetualDiscounts now yield 5.62%, equivalent to 7.87% interest at the standard equivalency factor of 1.4x. Long corporates continue to yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 225bp, This marks a significant decline from the 240bp recorded February 9; it should be remembered that while the two figures mentioned are compable (with the caveate that there aren’t too many issuers in that index any more), they are less comparable – and a good comparison would require explicit assumptions of spreads between issuers, etc. – with all earlier data.

Daniel K Tarullo, Member of the Board of Governors of the Federal Reserve System, testified before the Committee on Financial Services, US House of Representatives, Washington DC, 15 February 2011, in an effort titled Assessing the regulatory, economic, and market implications of the Dodd-Frank derivatives title. Very non-committal and not much meat, but there was one interesting admission that I believe has been downplayed in the debate so far:

Title VIII of the act complements the role of central clearing in Title VII through heightened supervisory oversight of systemically important financial market utilities, including systemically important facilities that clear swaps. This heightened oversight is important because financial market utilities such as central counterparties concentrate risk and thus have the potential to transmit shocks throughout the financial markets. As part of Title VIII, the Board also was given new authority to provide emergency collateralized liquidity in unusual and exigent circumstances to systemically important financial market utilities. We are carefully considering ways to implement this provision in a manner that protects taxpayers and limits any rise in moral hazard.

Additionally, he floated an idea for discretionary exemptions; seeking these exemptions will create jobs for lobbyists and other smiley-boys:

Within these statutory constraints, the Board and the other prudential regulators are working to implement the margin provisions in a way that takes appropriate account of the relatively low systemic risk posed by most end users. For example, we are considering if it would be appropriate to allow a banking organization that is a dealer or major participant to establish a threshold with respect to an end-user counterparty, based on a credit exposure limit that is approved and monitored as part of the credit approval process, below which the end user would not have to post margin. The Board appreciates that posting margin would impose costs on end users, possibly inhibiting their ability to manage their risks. The Board also believes that the margin regime should be applied only to contracts entered into after the new requirement becomes effective.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 1bp, FixedResets down 7bp while DeemedRetractibles gained 15bp. Not much volatility, volume was average, and the “Last” spread on FTS.PR.G was rather wide. SLF blocks were the volume highlight.

The Basel Committee has released its Revisions to the Basel II market risk framework – updated as of 31 December 2010, complete with a PDF that has now crashed my Internet Explorer twice. The press release states:

Since the financial crisis began in mid-2007, an important source of losses and of the build up of leverage occurred in the trading book. A main contributing factor was that the current capital framework for market risk, based on the 1996 Amendment to the Capital Accord to incorporate market risks, does not capture some key risks. In response, the Basel Committee on Banking Supervision (the Committee) supplements the current value-at-risk based trading book framework with an incremental risk capital charge, which includes default risk as well as migration risk, for unsecuritised credit products. For securitised products, the capital charges of the banking book will apply with a limited exception for certain so-called correlation trading activities, where banks may be allowed by their supervisor to calculate a comprehensive risk capital charge subject to strict qualitative minimum requirements as well as stress testing requirements. These measures will reduce the incentive for regulatory arbitrage between the banking and trading books.

An additional response to the crisis is the introduction of a stressed value-at-risk requirement. Losses in most banks’ trading books during the financial crisis have been significantly higher than the minimum capital requirements under the former Pillar 1 market risk rules. The Committee therefore requires banks to calculate a stressed value-at-risk taking into account a one-year observation period relating to significant losses, which must be calculated in addition to the value-at-risk based on the most recent one-year observation period. The additional stressed value-at-risk requirement will also help reduce the procyclicality of the minimum capital requirements for market risk.

As I have often stated here, I’m not completely certain that this is a step forward. Trading is functionally different from holding, and a trader may well wish to hold a position in El Crapola Corporation paper for a while because he knows he’s got a buyer. Problems can arise – and did arise during the crisis – when the paper that couldn’t be sold was kept on the trading book, instead of migrating to the banking book as it aged.

I haven’t seen any discussion of this point anywhere, so this is either a very profound point, or a very naive one. Take your pick.

Sell Side analysts are a hoot:

So, when analysts are raising their recommendations on a stock, that should be telling people to buy more of it (or, sell less of it); when they are cutting their recommendations, that’s telling people to sell more (or, buy less). In both cases, especially when you’re talking about well-known analysts at major firms, we would expect this to filter down to the stocks themselves – downgrades serve to drive stock prices lower, upgrades to push them higher. Right?

As it turns out, not so much. In fact, it would appear that as long as they spell your company’s name right,upgrades and downgrades are both good news for your stock.

Laszlo Birinyi and Amanda Crumb, of independent stock-market research firm Birinyi Associates Inc., recently analyzed more than 2,700 upgrades and downgrades issued by 19 Wall Street firms since the market bottomed in March, 2009. They found that – as expected – upgraded stocks rose an average of 2.03 per cent on the day of their upgrade, while downgraded stocks averaged a 2.02-per-cent drop on the day of the news.

But once they looked even a mere week further out, this expected trend no longer held. Yes, the upgraded stocks continued to move higher, both on an absolute basis and relative to the S&P 500 benchmark, and these gains got stronger as time passed. What wasn’t expected, though, was that the same was also true for the downgrades.

Downgraded stocks not only typically rose in the weeks to months following the downgrades, but after an initial underperformance relative to the S&P 500 in the first week, they significantly outperformed the benchmark at one month and three months out. What’s more, this surprising upward trend among downgrades didn’t appear to have been skewed by some large incorrect calls at a couple of firms; the gains were seen across virtually all 19 investing firms.

Remember 2005? Remember how it was so friggin’ obvious that subprime was a nascent disaster? Remember giving learned lectures about how big the real estate bubble was? Remember how it was all the fault of evil bonus-loving Wall Street vampires? I don’t. The Boston Fed has a similarly faulty memory. And, it would seem, John Paulso, most famous for making a fortune betting against it, and second-most famous for being disrespected in the Boston Fed paper, can’t remember that either:

As one of the few winners from the financial crisis, John A. Paulson looks pretty smart. His hedge fund firm, Paulson and Company, netted $15 billion betting against the subprime mortgage market — and he continues to profit from his wager on gold.

But in audio recordings recently released by Financial Crisis Inquiry Commission, Mr. Paulson reveals just how much flack he got from professionals and peers, who in the early days of the turmoil derided his big bet as the misguided move of a “novice.”

“Most of them, when we did express our viewpoints, thought we were inexperienced novices in the mortgage market,” Mr. Paulson said in an interview with the commission in 2010. “We were very, very much in the minority. If I said a thousand-to-one, we were the one. Even friends of ours thought we were so wrong, they felt sorry for us.”

The Evil, bonus-seeking Fabulous Fab, as one may recall, was the one who (as discussed on April 21, 2010) conspired with the smart cookies at ACA and IKB to fleece the poor neophyte. Oh, no, wait, sorry, it was the other way ’round.

It was another relatively quiet, slowly rising day on the Canadian preferred share market, with PerpetualDiscounts up 5bp, FixedResets gaining 1bp and DeemedRetractibles winning 9bp, all on quiet, “normal” volume with very little price volatility.

There is one problem with directing tax revenue to debt reduction: it means you can’t spend it. EU plans are running into roadblocks:

Greece joined Italy in objecting to annual numerical debt-reduction targets in a fresh challenge to the German-led drive for tougher economic safeguards to underpin the euro.

Greece, the first deficit-riddled euro country to fall back on financial aid, says the proposed rule would force it to make impossibly large cuts once its support package runs out in 2013, according to a draft of European Union legislation.

“All member states except two already accepted the proposal,” said an EU briefing note obtained by Bloomberg News before next week’s debate among finance ministers. “Italy and Greece have a reserve on the numerical benchmark.”

Greece or Italy alone could veto the rule, undercutting the tougher enforcement demanded by Germany as a condition for beefing up the 750 billion-euro ($1 trillion) rescue fund for distressed states.

Assiduous Readers will remember it was France and Germany who scuttled the 3% deficit rule when it was no longer convenient to them.

The Fannie & Freddie problem is lurching towards the limelight:

U.S. Treasury Secretary Timothy F. Geithner presented Congress with a set of options for weaning the $11 trillion mortgage market from its dependence on the government, while calling for changes to be phased in “responsibly and carefully” to avoid economic disruptions.
…
The options suggest differing degrees of government involvement in the system. The most dramatic would involve a “privatized” system of housing finance, with a government role to help “narrowly targeted” low-income and veteran buyers.

A middle ground would replace Fannie and Freddie with a system that helps low-income and veteran buyers in normal times and also provides an expanded guarantee that the government could ramp up in a crisis. The paper suggests using high-priced guarantee fees or restricted amounts of public insurance to achieve this goal.

A third option has the biggest government role and would hew closest to the current system. It would impose more regulation and give the government a role in “catastrophic reinsurance behind significant private capital,” so as to provide a backstop in times of crisis.

We have a wee bit of xenophobia happening:

Ontario Finance Minister Dwight Duncan has turned up the heat in the political debate surrounding the proposed transatlantic stock-exchange transaction, saying he does not want a “strategic asset” owned by the Middle East.

“We do business with the Middle East,” Mr. Duncan told reporters at Queen’s Park on Friday. “I am just not sure I want them owning our stock exchange.”

Then buy it yourself – jerk. He doesn’t even have the “finite natural resource” excuse. Seems to me that if a foreign-owned TMX stops doing its job properly, then there are a few Alternative Trading Systems that would be pleased to pick up the slack. Or somebody will write the code to start up a new one. But I guess Duncan thinks Canadians are too stupid to do that.

It was a quiet day on the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets down 6bp and DeemedRetractibles gaining 5bp. Volatility was small and volume was muted.

There’s always a new wrinkle:

ETFs have emerged as a possible mechanism for maximizing gains in one stock while potentially masking trading patterns, people familiar with the matter say.

In one scenario, a trader could learn information about a company, buy an ETF that includes the company’s stock, and short sell the other stocks in the ETF.

The practice, known as ETF-stripping, would allow the trader to benefit from movements in the company’s share price without directly buying or selling that stock.

It was a good day in the Canadian preferred share market as PerpetualDiscounts gained 4bp, FixedResets were up 2bp and DeemedRetractibles leapt ahead by 21bp. Not much volatility, with ony four entries on the Performance Highlights table. Volume remained well above average.

Choose your partners! Now it looks like Deutsche Bourse will purchase Euronext:

Deutsche Boerse AG is in advanced talks to buy NYSE Euronext in an all-stock transaction that would create the world’s biggest exchange operator, accelerating a day of takeovers that began with London Stock Exchange Group Plc’s acquisition of TMX Group Inc.

NYSE and Deutsche Boerse said they will produce 300 million euros ($410 million) in cost savings, according to a statement. Duncan Niederauer, New York-based NYSE Euronext’s chief executive officer, will hold the same job at the combined company. Frankfurt-based Reto Francioni, CEO of Deutsche Boerse, will be chairman. Deutsche Boerse will own about 59 percent to 60 percent of the joined corporation.

A new generation of Goldman Sachs guys has learned a lesson:

Goldman Sachs was “buying more illiquid assets than we probably should have,” Viniar, 55, said today at a conference in Miami hosted by Credit Suisse Group AG, his eighth consecutive appearance at the annual event. “It was a good lesson learned.”

“Less liquid assets” increased at a 39 percent compound annual growth rate between the start of 2005 and the start of 2008, compared with 24 percent growth in liquid assets, according to a slide Viniar included in his presentation. Since the first quarter of 2008, the firm has reduced holdings of such investments at an 18 percent compound annual rate, while liquid assets are down 9 percent.

The assets included mortgage-backed and other asset-backed securities, loans, high-yield debt, emerging-market stocks and bonds and investments in funds and private equity, the slide showed. They totaled $172 billion in the first quarter of 2008, or 14 percent of the firm’s balance sheet, up from $65 billion, or 11 percent, three years earlier.

An IMF report titled IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07 bears the message:

This evaluation assesses the performance of IMF surveillance in the run-up to the global financial and economic crisis and offers recommendations on how to strengthen the IMF’s ability to discern risks and vulnerabilities and to warn the membership in the future. It finds that the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak. The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility. The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth. The belief that financial markets were fundamentally sound and that large financial institutions could weather any likely problem lessened the sense of urgency to address risks or to worry about possible severe adverse outcomes. Surveillance also paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies. Advanced economies were not included in the Vulnerability Exercise launched after the Asian crisis, despite internal discussions and calls to this effect from Board members and others.
…
The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.

There will doubtless be some who find it surprising that Holy Regulators are no less fallible than Evil Bonus-Hunters.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts basically flat, FixedResets gaining 15bp and DeemedRetractibles down 1bp. Volume was heavy.

PerpetualDiscounts now yield 5.61%, equivalent to 7.99% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 240bp. Note that this figure is not really comparable to anything that has ever been reported here before: it seems fair to speculate that recent figures have been pushed downwards by speculation that banks’ (and, perhaps, eventually, other regulated issuers) PerpetualDiscounts would have their call probability determined by other than economic factors – as has in fact happened. With the recent transfer of these issues to the DeemedRetractibles index, the PerpetualDiscount index has had its composition changed dramatically: it is now comprised of two layers of a single conglomerate (PWF and POW, 9 issues), utility-equivalents (W, CIU and FTS, 4 issues) and a thing-a-majig (BAM, 2 issues).

There is talk of a merger between the TMX and the London Stock Exchange:

London Stock Exchange Group Plc is in advanced talks to purchase TMX Group Inc., owner of the Toronto Stock Exchange, to create the world’s eighth-largest exchange operator by market value.

LSE plans to issue stock according to a ratio that is similar to the companies’ relative market values, according to e-mailed statements. LSE would control 56 percent of the combined entity given its market capitalization of 2.42 billion British pounds ($3.89 billion) and TMX’s C$3 billion ($3.01 billion), according to data compiled by Bloomberg.
…
The exchanges will have headquarters in London and Toronto and maintain their current regulators, according to their e- mailed statements. Management of the merged company will be drawn from “a balance of leaders from both organizations,” the statements said.

Trading of TMX Group was halted, according to exchange data sent at 4:24 p.m. Toronto time today. The company is scheduled to report quarterly financial results tomorrow.

The guy who owns The Tea Emporium in First Canadian Place must be ecstatic.

DBRS has commented on the SEC’s Credit Rating Standardization Study:

This provision requires the Commission to study the feasibility and desirability of standardizing credit rating terminology and standardizing and streamlining certain quantitative measures under four broad topics.[Footnote] Within one year of enactment of the Dodd-Frank Act, the Commission must submit to Congress a report containing the findings of the study and the Commission’s recommendations, if any, with respect to the study.

DBRS suggests that credit rating standardization is neither desirable nor feasible. In short, DBRS endorses the views expressed by the American Securitization Forum on this matter.

Footnote: The four broad areas are: (1) standardizing credit ratings terminology, so that all credit rating agencies issue credit ratings using identical terms; (2) standardizing the market stress conditions under which ratings are evaluated; (3) requiring a quantitative correspondence between credit ratings and a range of default probabilities and loss expectations under standardized conditions of economic stress; and (4) standardizing credit rating terminology across asset classes, so that named ratings correspond to a standard range of default probabilities and expected losses independent of asset class and issuing entity.

I haven’t been following this at all, but the whole project seems ill-advised to me at first glance. As an investor, I want a broad range of opinions, particularly in relation to market stress and economic stress. The whole point seems to be to quantify your guesses down to four decimal places; the type of project beloved of bureaucracy.

Robert Shiller doubts the ‘better living through better regulation’ story:

Robert Shiller, the Yale professor who correctly predicted the 1987 stock market collapse and the recent U.S. housing market meltdown, said Canada’s robust financial health compared to other nations is largely due to a random run-up in oil prices in the midst of the global financial crisis.

“It’s a major export for Canada and it went to US$140 a barrel in 2008, right when Canada needed it,” Prof. Shiller said in an interview Tuesday.
…
“It seems that if the country didn’t have that boost from oil, it would have done worse than the United States,” Prof. Shiller said.

The market came down a bit after yesterday’s euphoric response to the OSFI ruling, with PerpetualDiscounts flat, FixedResets down 29bp and DeemedRetractibles down 31bp. Volume was heavy.